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Auditing Chapter 14 Homework

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Auditing Chapter 14 Homework
Kayla Harbaugh
Quiz by Kayla Harbaugh, updated more than 1 year ago
Kayla Harbaugh
Created by Kayla Harbaugh over 3 years ago
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Question 1

Question
Which of the following is one of the most important drivers of audit quality in cases where an auditor may feel some pressure to acquiesce to management’s demands to not require that misstatements be corrected in order to preserve a harmonious working relationship?
Answer
  • a. Annual income of the CPA firm.
  • b. Firm culture.
  • c. Ethics training.
  • d. PCAOB guidance.

Question 2

Question
An audit firm culture that emphasizes “doing the right thing” does not incorporate which of the following to enhance audit quality?
Answer
  • a. Yielding to management’s demands in order to promote additional service engagements.
  • b. Emphasizing long-term reputation over the immediate satisfaction of client preferences.
  • c. Taking sufficient time to deal with difficult client issues.
  • d. Encouraging auditors to seek consultation with other members of the audit firm.

Question 3

Question
Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years?
Answer
  • a. Rollover.
  • b. Dual.
  • c. Percentage.
  • d. Iron curtain.

Question 4

Question
Which of the following is required by the dual approach for assessing uncorrected misstatements?
Answer
  • a. The application of the rollover method.
  • b. Sequential application of both the rollover and iron curtain methods.
  • c. Simultaneous application of both the rollover and iron curtain methods.
  • d. The application of the iron curtain method.

Question 5

Question
Which of the following types of information is not a type of evidence that the auditor should obtain concerning contingencies?
Answer
  • a. Accounts receivable confirmations.
  • b. Documentation of communication with internal and external legal counsel of the client.
  • c. Documentation of contingent liabilities contained in corporate minutes, correspondence from governmental agencies, and bank confirmations.
  • d. Information about major contracts in which contingencies may be present.

Question 6

Question
Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims?
Answer
  • a. A letter of audit inquiry.
  • b. A management representation letter.
  • c. A loss reserve confirmation.
  • d. A management letter.

Question 7

Question
Assume a situation in which an attorney who provided significant litigation counsel to a client refuses to furnish information requested in an audit. Which of the following descriptions best describes this situation from the auditor’s perspective?
Answer
  • a. A violation of the attorney-client privilege.
  • b. A departure from GAAP.
  • c. A contingent liability.
  • d. A scope limitation.

Question 8

Question
Fulton Educational Company, Inc. has a matter of material litigation that is threatened, but that has not gone to trial. The auditor's consideration of such a matter will not include which of the following?
Answer
  • a. Assessing whether accrual or disclosure by the client was reported in accordance with GAAP.
  • b. Discussing the matter with the client and their insurance adjuster.
  • c. Confirming with the harmed party regarding the amount that will be claimed.
  • d. Sending a letter to the client's attorneys for more information.

Question 9

Question
In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment provided by management to the auditor, which of the following is the client’s lawyer not requested to provide?
Answer
  • a. Information on the compliance of the disclosures with GAAP.
  • b. Information on any limitations on the lawyer’s response.
  • c. Information on the completeness of management’s list.
  • d. Information on the likelihood and range of possible losses.

Question 10

Question
Which one of the following is false regarding the adequacy of disclosures in a financial statement audit?
Answer
  • a. The auditor should consider matters for disclosure while gathering evidence during the course of the audit, not just at the end of the audit.
  • b. The auditor’s report does not specifically cover the statements made by management in the “Management Discussion and Analysis” (MD&A) section of the annual report.
  • c. Disclosures should be limited to only checklist items.
  • d. One of the key disclosures is a summary of significant accounting policies used by the company.

Question 11

Question
Assessing disclosures does not require reasonable assurance of which of the following?
Answer
  • a. The disclosures are understandable to users.
  • b. Disclosed events and transactions have occurred and pertain to the entity.
  • c. All material and immaterial disclosures have been reported.
  • d. The information is disclosed accurately and at appropriate amounts.

Question 12

Question
Which of the following is not an inherent limitation in an auditor’s ability to detect material misstatements relating to a client’s compliance with laws and regulations?
Answer
  • a. Auditors are not required to consider the applicable legal and regulatory frameworks that apply to the entity.
  • b. The legal implications of noncompliance are ultimately a matter for legal authorities to resolve, and are not a matter about which the auditor can resolve.
  • c. Management may act to conceal noncompliance, or may override controls, or may intentionally misrepresent facts to the auditor.
  • d. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements, so the information systems relating to financial reporting may not capture noncompliance.

Question 13

Question
On what information does the auditor base a going concern evaluation?
Answer
  • a. On separate procedures.
  • b. On the management discussion and analysis (MD&A).
  • c. On the statement of cash flows for the current period.
  • d. On information obtained from normal audit procedures performed to test management’s assertions.

Question 14

Question
If the auditor concludes that there may be a going-concern problem with the client, which of the following is the best course of action for the auditor to follow?
Answer
  • a. Issue a qualified opinion.
  • b. Chart the negative trends as an addendum to the audit report.
  • c. Identify and assess management's plan to overcome the situation.
  • d. Increase fees to cover the probable exposure.

Question 15

Question
Which one of the following would the auditor consider to be an indication of a potential going-concern problem?
Answer
  • a. Loss of the controller to a competitor.
  • b. Adverse key financial ratios.
  • c. Large increase to sales in the month previous to year-end.
  • d. Improper reporting of internal controls by management.

Question 16

Question
Which one of the following is not a key condition indicating doubt about a client’s ability to continue as a going-concern?
Answer
  • a. Adverse key financial ratios.
  • b. Employee strike that halts operations for several months.
  • c. Default on bank debt.
  • d. Company has not paid dividends to date.

Question 17

Question
Which of the following is not a potential indicator of going-concern problems for a client?
Answer
  • a. Default on a loan.
  • b. Plan to sell nonessential assets.
  • c. Negative trends in key financial ratios.
  • d. Loss of key personnel.

Question 18

Question
Analytical procedures conducted at the end of an audit are performed to examine trends and changes. What is typically another purpose of analytical procedures at the end of the audit?
Answer
  • a. To provide the client with a value-added service in conjunction with audit activities.
  • b. To ask "hard questions" about the company's results and its relationship to external factors.
  • c. To increase the number of items reported in the management letter.
  • d. To document planning in accordance with GAAS.

Question 19

Question
The date of the audit opinion of Upton Industries, Inc. reads: March 7, 20Y8 except for Note D, as to which the date is March 12, 20Y8. What is this an example of?
Answer
  • a. A GAAP violation.
  • b. A contingent event.
  • c. Improper reporting.
  • d. Dual dating.

Question 20

Question
Which one of the following subsequent events will least likely result in an adjustment to the financial statements?
Answer
  • a. Bankruptcy of a customer who owes your client a material amount on open account at year end for which there is an inadequate allowance estimate.
  • b. Signing of a letter-of-intent by the client to acquire 55% of another entity for stock.
  • c. Sale of a large block of inventory at a price materially below carrying value.
  • d. Material change in the amount of settlement of a lawsuit which had been estimated at year end.

Question 21

Question
Which one of the following would be the most effective procedure for discovering material Type II subsequent events?
Answer
  • a. Resending all bank confirmations returned.
  • b. Surprise cash count at random locations.
  • c. Updating the search for unrecorded liabilities.
  • d. Reading of the minutes of board of directors' meetings.

Question 22

Question
Which of the following is the best example of a Type I subsequent event?
Answer
  • a. A related-party transaction occurs during the course of the audit.
  • b. The company initiates an initial public offering subsequent to year-end.
  • c. The company defaults on its line-of-credit with the bank subsequent to year end but previous to the release of the audit opinion.
  • d. Litigation that was accrued as a liability in the year under audit is settled subsequent to year-end for an amount in excess of estimates.

Question 23

Question
Which one of the following is not an example of an additional procedure that typically relates to the discovery of subsequent events?
Answer
  • a. Reading the board of directors' minutes for all meetings during the year and after year-end through the end of field work.
  • b. Management inquiry.
  • c. Reading interim financial statements and comparing them to the audited statements to note significant changes.
  • d. Partner review of all workpapers.

Question 24

Question
Which of the following is not a purpose of the management representation letter?
Answer
  • a. It decreases the possibility of misunderstanding concerning the matters that are the subject of the representations.
  • b. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.
  • c. It reminds management of its responsibility for the financial statements.
  • d. It implies that the auditor is responsible for the design of the internal controls.

Question 25

Question
Management of AllTech, Inc. refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company's privacy. What does this refusal constitute?
Answer
  • a. A scope limitation.
  • b. A violation of full and fair disclosure.
  • c. A breakdown in internal controls.
  • d. A securities law violation.

Question 26

Question
Which one of the following is not a purpose of the management representation letter?
Answer
  • a. It further acknowledges management's responsibility for the financial statements.
  • b. It reduces the possibility of misunderstanding concerning the matters that are the subject of the representations.
  • c. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses.
  • d. It clearly documents the audit procedures that were performed by the auditors.

Question 27

Question
Where would the auditor make mention of issues noted during audit procedures that are not of audit significance?
Answer
  • a. Representation letter.
  • b. Attorney letter.
  • c. Management letter.
  • d. Engagement letter.

Question 28

Question
If the audit team encounters difficulties in performing an audit, who should the audit team communicate these matters to?
Answer
  • a. The SEC.
  • b. The PCAOB.
  • c. The audit committee.
  • d. Management.

Question 29

Question
Which of the following is not a required communication with the audit committee?
Answer
  • a. Analytical review.
  • b. Audit adjustments.
  • c. Uncorrected misstatements.
  • d. Auditor’s responsibility under GAAS.

Question 30

Question
Before releasing the audit report, which of the following would the auditor most likely do?
Answer
  • a. Perform an analytical review.
  • b. Issue a management letter.
  • c. Check on a schedule of partner rotation.
  • d. Estimate client fee for subsequent services to be performed.
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